The potential to grow your long-term wealth through real estate investments is exciting! However, amidst the enthusiasm of purchasing properties and collecting rental income, you must recognize the importance of bookkeeping.
Strong bookkeeping practices give you a clear picture of the health of your investments. By following the tips below, you’re more likely to reach your wealth goals.
1. Get your financial records organized.
This tip is listed first because it’s the cornerstone to effective bookkeeping for investors. Start by determining if you prefer a digital or manual recording-keeping system. (Cloud-based accountant software is helpful for digitally organizing records, and you can access your information from anywhere with internet access.) As you work to get organized, be sure all documents, receipts and statements are categorized and easy to access.
2. Keep personal and business finances separate.
While this one is related to the first tip about organization, it deserves its own section; this is a hard and fast rule for effective bookkeeping. You cannot mix your business and personal finances.
You should open a dedicated business bank account to manage all transactions related to your real estate investments. This separation simplifies bookkeeping, making it easier to track income and expenses. You also may want to obtain a business credit card for tracking purposes too.
3. Track income and expenses consistently.
As mentioned in the previous section, tracking is essential, but consistently tracking your income and expenses help to ensure accuracy. Record rental income as it is received. Categorize expenses as they occur, and be sure to distinguish between different types such as repairs, maintenance and property taxes.
With consistent tracking, you can regularly monitor cash flow, giving you accurate insights into the financial health of your real estate investing.
4. Learn basic tax information.
While we strongly encourage you to work with a tax professional, we also suggest knowing basic tax information. (These articles are on small business taxes and tax planning are good starting points.) Identify eligible tax deductions specific to real estate investments, and keep accurate records related to these deductions. By starting here, you’ll save time and probably money during tax season.
5. Create and use a budget.
Being new to real estate investing is exhilarating. But it’s a business (not a hobby or “get rich” scheme). And businesses flourish in the long run when using a budget.
Create a comprehensive budget that outlines expected income, expenses and contingencies. Regularly monitor and adjust your budget to reflect changing market conditions or unexpected expenses. This proactive approach will help you stay on track and invest for many years.
Morgan & Associates Work with Real Estate Investors
If you’re ready to take your real estate investments to new heights, start with the tips in this article. We also encourage you to contact us with questions about specific situations or tax laws pertaining to real estate. It’s our job to know the answers!